Daily Voice | Corporate Earnings, BFSI Sector Critical For Market To Scale New Highs,

After maintaining status quo on the benchmark rates, the Reserve Bank of India is mapping the way forward for the economy to stay the course, through the hurdles of inflation and emergence of a new Corona virus, believes Naveen Kulkarni, Chief Investment Officer at Axis Securities.

The market has corrected over 6 percent from its record highs and experts are busy working out the market dynamics. “Corporate earnings and BFSI sector performance will be very critical for the market to hit new highs from the current levels,” says Kulkarni, seasoned in the financial services and telecom sectors. Excerpts from an interview with Moneycontrol:

We have seen the RBI monetary policy decision. What do you think could be the reason for retaining the reverse repo rate, when most experts expected a hike? Do you see a dual threat to the economy from Omicron and inflation behind this?

The RBI policy is focused on pushing growth in the economy through demand revival by keeping interest rates benign and liquidity conditions comfortable. The RBI’s stance on inflation has been overall dovish with mild tinkering in estimates.

We believe the RBI is in a wait-and-watch mode in the wake of the new Covid variant, keen to keep the economy on track towards normalisation, albeit with an eye on inflation by providing the necessary hand-holding in an uncertain environment. The approach towards normalisation has been gradual with non-disruptive liquidity pull-back measures.

Hiking the reverse repo rate at this juncture could put pressure on the rebalancing of liquidity conditions in the system and is likely to be undertaken in a phased manner as and when growth picks up and the Omicron threat wanes or is under control.

What is your reading on the second quarter GDP? Have you changed your full year (FY22) estimates for GDP?

The Q2FY22 GDP numbers were in line with the expectations. While the numbers look optically strong on a lower base, the Q3 numbers will be more important considering the lower base and improving capacity utilisation across sectors. Even travel has picked up in Q3 and it has gained traction. So, the Q3 numbers will be even more important. Our expectations for FY22 remain largely unchanged for now.

Do you think it is the right time to bet on the auto sector, especially after looking at monthly sales data for November 2021?

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The auto sector has a huge backlog of orders because of chip shortages. Also, input costs were rising quite fast in previous quarters. The chip shortage issue will start abating in the forthcoming quarters, and margins for companies will start improving.

This seems to be an appropriate time to invest in the auto sector keeping 2022 in mind as it will see improvement in both revenues and margins.

What are the big events to watch out for in the coming year of 2022? Will these events hit the market sentiment?

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In 2022, there are quite a few important events such as the state elections in Uttar Pradesh which will be very crucial. Also, the Fed tapering programme will be in effect, and a view on rate hikes will be very important. So, these will be key events to look out for in 2022.

Do you expect the market to return to its record high levels before the Union Budget?

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The budget for 2021 was very good but on more occasions the budget has been a non-event. The current GST tax collections are quite strong and the nominal GDP growth rate is picking up which means tax collections will continue to be strong. This gives the government significant room to manage the budget. However, these factors are known and global events like Fed tapering will also have an impact on the markets. Thus, it seems that the market will take time before making fresh new highs. Corporate earnings and BFSI sector performance will be very critical for the market to hit new highs from the current levels.

With the emergence of the Omicron variant, do you think the risk of a third Covid wave?

It’s too early to say anything about the new variant’s impact in India. India has been a great success story in vaccination drive, and overall, it has managed the impact of COVID very well. Thus, intuitively, it seems that the impact of the new Covid variant may not be as significant as the previous two waves. However, it is still too early to make meaningful sense of the new variant till we see a significant change in infections in India.

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